CBO Warns Congressional Spending Is Driving Up the Deficit

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After years of steady decline as the economy improved, the federal budget deficit this year will increase in relationship to the overall size of the economy for the first time since 2009 and continue to grow over the coming decade, according to new estimates by the non-partisan Congressional Budget Office.

The CBO calculates the deficit will total $544 billion in 2016 or $105 billion more than the deficit recorded last year. At 2.9 percent of the Gross Domestic Product, the anticipated surge in red ink will mark the first time that the deficit has increased in relationship to the economy since peaking at 9.8 percent in 2009.

The fiscal 2016 deficit that CBO is now projecting is $130 billion higher than the projected deficit last August 2015 and has much to do with Congress’s end-of-year spending spree: Last December, Congress approved nearly $2 trillion of new spending and renewed tax breaks for corporations, businesses and individuals.

The deficit has received scant attention in recent years, as the once trillion-dollar deficits in the depths of the Great Recession have given way to steady declines hailed by both the Obama administration and congressional leaders. Moreover, Republican and Democratic presidential candidates have tripped over one another in proposing major tax cuts and government spending initiatives to try to woo voters.

However, CBO renewed its warning of long-term risks to the economy and government operations unless Congress and the President begin addressing the problems while there is still time to act.

“The likelihood of a fiscal crisis in the United States would increase” without appropriate action,” the CBO study said. “There would be a greater risk that investors would become unwilling to finance the government’s borrowing needs unless they were compensated with very high interest rates; if that happened, interest rates on federal debt would rise suddenly and sharply.”

Marc Goldwein, senior policy director of the Committee for a Responsible Federal budget, an advocate for budget restraint, said today, “This is a pretty damning report, with both deficit and debt high and on the rise – and way faster than previously projected.”

Last December, Congress once again scrapped legal spending limits and approved $1.1 trillion in defense and domestic discretionary spending for the remainder of fiscal 2016 and a legislative Christmas tree of about $680 billion of renewed tax breaks for businesses and individuals over the next 10 years.

Those actions amounted to a government spending binge because little if any of the added domestic and defense spending and generous tax breaks were offset by cuts in other areas or tax increases. That explains why the deficit is going up again in 2016, according to CBO, and will continue to mount in the coming years.

“Last year’s fiscal irresponsibility, particularly the end-of-the-year tax bill, is responsible for about half of the deterioration,” Goldwein said. “The other half appears to be driven largely by lower economic growth assumptions.”

The CBO report said that the projected annual deficits would increase overall debt held by the public to 76 percent of GDP by the end of 2016, about 2 percentage points higher than it was last year and higher than it has been since the years immediately following World War II.”

Another factor contributing to the rising budget deficit this year is a highly technical matter relating to the timing of government payments. About $43 billion of this year’s increase in the deficit will result from a shift in the timing of some payments that the government would ordinarily have made in fiscal year 2017 to the final days of fiscal 2016. If it weren’t for that timing glitch, projected deficit in 2016 would be just $500 billion, or 2.7 percent of GDP.

If current laws remained unchanged, by 2026 it would be considerably larger than its average over the past 50 years, according to the new CBO Budget and Economic Outlook for 2016 through 2016. Debt held by the public would also grow significantly from its already high level.

Under CBO’s revised baseline projections, growth in spending – especially for Social Security, health care and interest on the federal debt – will outpace growth in revenues over the coming decade. Under the latest CBO scenario, deficits will increase modestly through 2018 but then start to accelerate, reaching $1.4 trillion in 2026 absent some legislative intervention to slow the growth of spending.

The projected annual deficits would drive up the overall national debt even more sharply. “Three decades from now, for instance, debt held by the public is projected to equal 155 percent of GDP, a higher percentage than any previously recorded in the United States.”

Such high and rising debt would have serious consequences for the government and the economy, according to CBO. For example:

Federal spending on interest payments would rise substantially.

The nation’s capital stock would ultimately be smaller than it would be if debt was smaller, and productivity and total wages would be lower.

Congress would have less flexibility to use tax and spending policies to respond to unexpected challenges.

On other matters, CBO anticipates that the economy will expand solidly this year and next,” according to a summary of the report. “Increases in demand for goods and services are expected to reduce the quantity of underused labor and capital, or ‘slack,’ in the economy—thereby encouraging greater participation in the labor force by reducing the unemployment rate and pushing up compensation.”

According to the analysis, that slack will also drive up inflation and interest rates. “Over the following years, CBO projects, output will grow at a more modest pace, constrained by relatively slow growth in the nation’s supply of labor,” the report said. “Nevertheless, in those later years, output is anticipated to grow more quickly than it has during the past decade.”

Washington Editor and D.C. Bureau Chief Eric Pianin is a veteran journalist who has covered the federal government, congressional budget and tax issues, and national politics. He spent over 25 years at The Washington Post.